EU proposes debt loophole for green investments


Yesterday the The ECB announced that in the fourth quarter, that would do “a slightly lower rate of net asset purchases under the PEPP compared to the two previous quarters“(even as Lagarde was trying to convince the markets not call it tapering) with Reuters sources adding that “the decision-makers have set a monthly target between 60 billion and 70 billion euros ” against 80 billion currently “with the ability to buy more or less, depending on market conditions. ” Put that non-conical cone in the context, Nomura calculated that “even if the net PEPP is reduced to 60 billion euros / month, the ECB would still buy 85% of the remaining gross supply, strongly supporting the rates of the euro. “ Despite the contraction in ECB bond purchases, Lagarde made it clear that the fiscal spur must sink:


And to facilitate this despite noisy, if not theatrical, periodic objections from conservative “northern” European nations, on Friday European Union finance ministers will begin discussing on Friday how to change their fiscal rules to do so. in the face of a huge increase in public debt during the coronavirus pandemic. and how to encourage the spending needed to stop climate change.

The most notable proposition is to exempt “green” investments from the calculations of deficit and debt limits and to temporarily forget the existing rules which stipulate that the debt must be reduced every year, Reuters reported citing documents prepared for the talks of ministers showed.

“The challenge for the years to come will be to consolidate deficits while increasing green investments to achieve ambitious EU targets of reducing emissions or any other investment,” said a note prepared by host Slovenia.

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In other words, the EU will use the “green” straw man in the fight against climate change as a loophole to issue debt beyond the EU self-imposed ceilings.

Indeed, an analysis commissioned by the ministers of the Bruegel think-tank showed additional public investments to meet EU climate targets will need to be 0.5% to 1.0% of GDP per year during this decade and this may require flexibility in the rules.

“There are substantial investment needs which will be very difficult to achieve in the current fiscal framework,” Bruegel newspaper said. “Past episodes of consolidation have led to significant reductions in public investment, while it is now necessary to significantly increase investment.”

“A ‘green golden rule’ (excluding net green investment from fiscal indicators used to measure compliance with fiscal rules) is the most promising option to address this tension,” he said. he declares.

EU fiscal rules, created in 1997 and amended three times since, set limits on government borrowing to protect the value of the euro. They force EU countries to reduce their debt to less than 60% of GDP and their annual deficits to less than 3% of GDP or face fines.

While the rules were “temporarily” suspended in 2020 to give governments more leeway to fight the coronavirus pandemic, they are expected to be reinstated in 2023. Changes could be made before that date to better adapt them to the new challenges facing them. Europe is facing, the biggest of which how to issue much more debt permanently without violating fiscal rules.

As might be expected, some EU officials argue that the rules reflect the realities of the past when debt was relatively low and interest rates relatively high, as opposed to high debt and the cost of borrowing. very low or even negative today, which makes high debt more sustainable. This is also known as the “MMT” argument.

Another downside to these rules according to Europe’s frenzied spenders is that they give no special treatment to public investment at a time when the 27 countries that make up the EU embark on their biggest economic transformation to reach zero. net CO2 emissions by 2050. transformation that has already raised the price of natural gas to stratospheric levels and sparked European protests against hyperinflation of the price of electricity.

Needless to say, bringing deficits and debt within the EU’s limits of 3% and 60% respectively would be a “major challenge” in Reuters words – and “impossible” in ours – and cripple the recovery, according to Reuters. European officials.

According to the Commission, the 19 countries that share the euro will have a budget deficit of 8.0% of GDP this year, up from 7.2% last year, while their public debt is expected to reach 102.4% of GDP. There is no way that number could ever drop back to 60%.

“The timetable for eliminating excessive deficits and achieving structural balance will have to be carefully considered as it is extremely important that budgetary constraints do not hamper growth,” said the Slovenian Presidency note.

The EU’s € 800 billion stimulus fund, which will provide liquidity to the bloc’s 27 members until 2026 for green investments, digitization and research and development, will help offset any planned fiscal consolidation, a. Bruegel said. But to make ‘green’ transformation a reality, EU fiscal rules will also need to be applied with maximum flexibility, he said, which means Europe will need much more capacity. indebtedness, a debt that will be largely monetized by the ECB. Bruegel recommended that the EU forgets its rule that each country must reduce its public debt by 1 / 20th of the surplus above 60% of GDP each year, because with such a high debt it is unrealistic.

In short, the original fiscal rules that shaped the EU are now dead.

“Too fast a pace of fiscal consolidation, such as that implemented after the global financial crisis of 2007 and the euro crisis that followed, can have a negative impact on potential output and trigger a new recession and should therefore be avoided, ”Bruegel said.

Discussions on how to change the rules to better adapt to changing economic realities are likely to be difficult and last until 2022, as trust between the more frugal northern countries of the EU and what they perceive as the south the most prodigy is very weak following the sovereign debt crisis of 2010-2015.


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